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TMI Blog2025 (1) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... f criminal proceedings; change of management of borrower unit; non-induction of the person in the Board of the company etc. The object of the Master Circular is salutary. The Master Circular aims to protect the country s banks and financial institutions from unscrupulous entities and individuals. It is intended to identify and punish those entities and individuals who have diverted or siphoned off borrowed funds for purposes other than for which the loan facility was availed leading to default in the repayment obligations. Such individuals and entities must be identified and their names be published in public domain so that they are barred from availing any further loan facility from any other bank. If such an exercise is not undertaken, the cycle of diversion/siphoning of borrowed funds; default and re-borrowing, leading to same situation may continue. Such a scenario may adversely affect the liquidity of the banking system and affect the overall financial health of the country. There is, thus, no doubt that the Master Circular aims to achieve a very laudable object. Notably, the scheme of the Master Circular indicates that it is both a punitive and preventive measure. The Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diate impact on his fundamental right to carry on business. It is settled law that a Fundamental right under Article 19 or 21 can be enforced even against persons other than State or its instrumentalities - there are no hesitation in holding the present petition to be maintainable against the present Respondent No. 1. Conclusion - The statutory procedural mechanism laid down in the Master Circular, interpreted in various decisions of the Supreme Court must be followed by the Respondent No. 1 and its committees in letter and spirit. The necessity of adhering to procedural fairness and natural justice in proceedings that have severe consequences, such as being declared a wilful defaulter established. The SCN and related orders quashed due to procedural lapses and violations of natural justice, while affirming the maintainability of the Petition under Article 226. Petition allowed. - REVATI MOHITE DERE DR. NEELA GOKHALE, JJ. For the Petitioner: Mr. Simil Purohit, Senior Advocate, with Ms. Supriya Majumdar, Mr. Rishabh Chandra i/b Vaish Associates,. For the Respondent No. 1-IDBI Bank: Mr. Prakash Shinde, with Mr. Harsh Sheth, Ms. Niyati Merchant i/b MDP Legal, For the Respondent No. 2: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surmises and conjectures and only assumed that the transactions were fraudulent. The NCLT observed that the said Report seemed to be based on assumptions which were neither examined nor cross-checked by confronting the parties to the transactions. Placing reliance solely on this report, the Respondent No. 1 Bank proceeded to declare the Petitioner as Wilful Defaulter. It is the grievance of the Petitioner that he was not given an opportunity of a meaningful hearing since the documents underlying the TAR were inaccessible to him thereby compelling him to approach this Court by filing the present petition. 5) Mr. Simil Purohit, learned Senior Counsel appeared for the Petitioner while Mr. Prakash Shinde, learned counsel appeared for the Respondent No. 1-Bank. Mr. Mohamedali Chunawala, learned counsel represented the Respondent No. 2. We have heard counsels for all the parties and perused the documents with their assistance. 6) Mr. Purohit took us through the correspondence between the parties in detail. He pointed out the show-cause notice dated 5 th April 2023 issued to him and his brother and co-director, Mr. Ajay under the Master Circular on Wilful Defaulters dated 1st July 2015 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the WDC, which was communicated to the Petitioner on the same day. The Petitioner addressed an e-mail dated 11th November 2024 to the RP seeking access to old documents of the company, however, the RP by e-mail dated 12th November 2024 indicated his inability as the new management had taken over the company and the RP stood discharged. The Petitioner by e-mail dated 27th November 2024 even reached out to the new management seeking inspection of old documents, which went unanswered. 10) Mr. Simil Purohit contended that the orders impugned herein are passed without application of mind and in complete disregard of the principles of natural justice. He says that the Respondent No. 1 had an obligation to provide access to the material based on which the Petitioner was declared to be a Wilful Defaulter . Most importantly, he points to the NCLT order dated 10th March 2021, which held the TAR to be inconclusive. He asserts that the allegations in the SCN were based on documents leading to the TAR. The Respondent No. 1 is under a statutory obligation to share the said documents without which the Petitioner cannot be expected to meaningfully defend himself. He thus says that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SCN and this indicates that the Petitioner availed of the opportunity despite his purported grievance of not having access to documents. Mr. Shinde states that the Petitioner was given a personal hearing and has also filed his written representation before the WDRC. It is only after considering all the documents/replies/representations and overall conspectus of the matter that the WDRC passed the detail order dated 16th September 2024 confirming the findings of the WDC and the Petitioner was declared as Wilful Defaulter by Order dated 25th October 2024 which is impugned in the present petition. Mr. Shinde thus affirms that there is no procedural infirmity in the procedure adopted by the Respondent No. 1, and it has complied with all the requirements set out in the Master Circular as well as the directions of the Apex Court in its various decisions. He thus urges us to dismiss the petition. He placed reliance on the following decisions of the Supreme Court and this Court: A) Mrinmayee Rohit Umrotkar v. Union of India Ors. 2021(4) Mh.L.J. B) Jah Developers (Supra) 15) Before proceeding to render an analysis in the facts of the case, it is essential to examine the scheme of the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause. Clause 2.5 reads as under: 2.5 Penal measures In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful defaulters (non-suit filed accounts) and list of wilful defaulters (suit filed accounts) are forwarded to SEBI by RBI and Credit Information Bureau (India) Ltd. (CIBIL) respectively. The following measures should be initiated by the banks and FIs against the wilful defaulters identified as per the definition indicated at paragraph 2.1 above: a) No additional facilities should be granted by any bank / FI to the listed wilful defaulters. In addition, the entrepreneurs / promoters of companies where banks / FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Development Financial Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a period of 5 years from the date the name of the wilful defaulter is published in the list of wilful defaulters by the RBI. b) The legal process, wherever warranted, against the borrowers / guarantors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a personal hearing if the Committee feels such an opportunity is necessary. (c) The Order of the Committee should be reviewed by another Committee headed by the Chairman / CEO and MD and consisting, in addition, of two independent directors of the Bank and the Order shall become final only after it is confirmed by the said Review Committee. However, if the Identification Committee does not pass an Order declaring a borrower as a Wilful defaulter, then the Review Committee need not be set up to review such decision. (d) As regard a non-promoter/non-whole time director, it should be kept in mind that Section 2(60) of the Companies Act, 2013 defines an officer who is in default to mean only the following categories of directors: (i) Whole-time director (ii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified; (iii) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who is declared as wilful defaulter. The availability of loans from financial institutions is the backbone of doing business. It is not only a mode of raising finance but it is also an indicator of the creditworthiness of the business entity. Hence, the deprivation to avail such facility virtually knocks a financial death knell on such individual or entity. 21) The Supreme Court in the case of Jah Developers (Supra), had an occasion to examine the consequences of a person being declared as wilful defaulter under the Master Circular. The Supreme Court held that a person declared as wilful defaulter affects the fundamental right of a person under Article 19 (1) (g) of the Constitution as it directly affects the right to do business and thus, the Master Circular must be construed reasonably. The relevant paragraph of the said decision reads as under:- 24. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 1-7-2015, as it is clear that the events of wilful default as mentioned in Para 2.1.3 would only relate to the individual facts of each case. Wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed Circular dated 1-7-2015 22) Subsequently, in the case of Rajesh Agarwal (Supra), the Supreme Court dealt with another similar Circular issued by the RBI known as the Master Directions on Frauds. The said Circular deals with the mechanism to declare an account as fraud. The Supreme Court held that such classifications entail serious civil consequences for the borrower. The proceedings forming an opinion about classification as fraud are administrative in nature and the principles of natural justice apply to the administrative decision making. It was held that there are both civil as well as penal consequences. Such consequences in the Master Directions on Frauds are similar to the consequences envisaged in the Master Circular and hence the observations made by the Supreme Court in Jah Developers (Supra) squarely applied. It was further held that the bar from raising finances could be fatal for the borrower leading to its civil death in addition to the infraction of their rights under Article 19 (1) (g) of the Constitution. It was further held that classifying an account as fraud not only affects the business and goodwill of the borrower, but also the right to reputation. 23) Thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilful Default Diversion of funds : The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. The term diversion of funds referred at paragraph 2.1.3(b) above, should be construed to cinclue transferring borrowed funds to the subsidiaries / Group companies or other corporates by whatever modalities. Position of Borrower (as per Transaction Review Report dated March 5, 2020 by M/s G D Apte Co.) BSIL had receivables of Rs. 74.50 crore as on 31.03.2016 from Shri Durga Trade Links Pvt. Ltd. (SDTL) arising out of the following transactions: Particulars Amount (Rs.Cr) Amount due as on 01.04.2015) 4.22 Amount receivable on account of purchase/sale transactions 33.94 Receivable by BSIL from related parties transferred to SDTL 15.02 Receivable by BSIL from other parties transferred to SDTL 21.07. Other entries 0.15 Total 74.50 The receivable from SDTL was reduced to Rs.74.27 crore from 01.04.2016 to 31.03.2019 mainly on account of funds received. No significant transactions were carried out between these parties aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that the forensic Report prepared by the Auditors simply assumes the transactions to be fraudulent and the conclusions that funds were siphoned away were reached in a summary manner. We specifically enquired with both the counsels as to whether the Forensic Report commented upon by the NCLT was the same as the TAR referred to in the SCN. We were assured by both the counsels that it was the same report. It is thus safe to accept that the basis of issuance of the SCN was primarily the findings in the TAR, which were observed by the NCLT to be mere assumptions. Considering the grave consequences that follow a finding by the WDC, the degree of proof required and expected to have been relied upon by the WDC should be much higher and not simply based on a TAR which itself was unacceptable to the NCLT. 27) Let us now examine the second aspect in the matter. The Petitioner via emails dated 22nd April 2023 and 25th May 2023 sought time to respond to the SCN specifically stating that he had no access to the documents underlying the TAR which was relied upon by the WDC and sought copies of the same. Neither providing the required documents nor replying to the request made by the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a shareholder in STDL, he must make efforts to procure the documents from STDL. Even Mr. Shinde in his arguments reiterated the justification that since the Petitioner was privy to the proceedings before the NCLT and the TAR was prepared with the Balance sheets and accounts statements of the BSIL, he is presumed to have the necessary information. It is pertinent to note that the proceedings before the NCLT pertaining to Corporate Debtor BSIL are quite distinct from the proceedings to declare Petitioner albeit a suspended director of BSIL, as wilful defaulter and the Petitioner is proceeded against in his individual capacity. Even if the Petitioner is presumed to have access to documents in the proceedings before the NCLT, he is justified in seeking documents in the conduct of WDC proceedings. It is not for the WDC to shrug away its responsibility under the pretext of such presumptions and assumptions. The statutory procedural mechanism laid down in the Master Circular, interpreted in various decisions of the Supreme Court must be followed by the Respondent No. 1 and its committees in letter and spirit. We thus, have no hesitation in agreeing with the Petitioner that the personal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te to deep and pervasive control to the nature of the duties/functions performed. In this connection, he also quoted Justice Vivian Bose s famous words in S. Krishnan v. State of Madras AIR 1951 SC 301 , about not placing undue importance on petty linguistic details, and penetrating deep into the heart and spirit of the Constitution . On the strength of this prescription, Justice Ramasubramanian ( as he then was) proceeded to answer the question whether a fundamental right under Articles 19 or 21 could be claimed other than against the state or its instrumentalities, in the affirmative. In this view of the matter, we have no hesitation in holding the present petition to be maintainable against the present Respondent No. 1. We have also perused the decision of this Court in Mrinmayee (Supra) relied upon by the Respondent No. 1 but the same is in a different context and hence does not assist the Respondent No. 1. 31) In view of the aforesaid discussion, we are inclined to quash and set aside the Show Cause Notice dated 5th April 2023 issued by the Respondent No. 1-Bank; order dated 14th September 2023 issued by the Wilful Defaulter Committee of the Respondent No. 1-Bank; Order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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